“Don’t Sweat the Dollar”

Presented by

Amy Klein

Fortune Magazine, August 12, 2002

Written by Rob Norton

Investor Worries• Terrorist threats

• Looming warfare

• Corporate scandals

• Recent decline of the dollar against foreign currencies

It’s Too Soon to Worry

• Dollar not low by historical standards

• Long-term time horizon

• Rates still well above the ‘90s

• Exchange remains competitive with foreign

currencies

Recent Exchange Rates

Euro

• Launched Jan. 1, 1999, at $1.17

• 1½ yrs lost 25% against the dollar

• 2000 only $.83; now $1.00

Japanese Yen

• Dollar is slightly above 10-year average

Dollar Previously Overvalued

• Continued climb through 2001 economy slump

• Forecasted months ago to fall 20%

• Argument: $ can sink another 10% without being undervalued

Why Are Investors Afraid?

• Decreasing purchasing power

• Increasing import prices fueling inflation

• Depressed value of foreign investment

• Compromise to U.S. economic recovery

Why Shouldn’t They Fear?

• Import prices have barely budged

• Dollar must fall considerably before inflation increases

• 25% decline to threaten foreign investment

and recovery

Advantages of a Lower Exchange Rate

• Competitive U.S. goods – benefits smokestack America

• Lower dollar value beneficial for manufacturers

• A strong dollar detrimental to U.S. exports

• Falling dollar helping manufacturers to recover

Solutions to the “Problem”

• Treasury can buy dollars and sell foreign currencies

Problem: effects only momentary

• Federal Reserve can increase interest rates

Problem: impair overall economic recovery

What Should We Do?

• Hold out for economic recovery

• Current slump only temporary

• Is innovation, productivity, economic growth higher anywhere else?